E-mail Story
Print Friendly
Send E-mail
Reprint story Front Page 
paperboy text news metro
Sunday, March 07, 2010
At First, Vaughan's Plan 'Worked Like A Charm'
FOR THE RECORD: The owner of Academy Plumbing, Heating, Air Conditioning & Electrical Inc. is Jules Appelman. His name was spelled incorrectly in this story.By Richard Metcalf
Copyright © 2010 Albuquerque Journal Journal Staff Writer
Doug Vaughan was frustrated.
The year was 1992 and the Albuquerque real estate executive was trying to get First Interstate Bank to re-establish a line of credit so he could open a West Side office. He believed he had more than enough collateral to secure a loan and needed cash to upgrade his operation as the real estate market rebounded from the 1980s crash.
The bank turned him down.
That rejection and Vaughan's subsequent dislike of borrowing from banks sent him down a path that led to years of prosperity — but ultimately to U.S. Bankruptcy Court and a state investigation into the sale of unregistered securities through a creative financing scheme that raised tens of millions of dollars from hundreds of investors.
"I didn't want my competitors getting too far ahead of me," Vaughan said in a five-year-old "Executive Summary" explaining his decision to use private investors instead of banks to raise money and outlining how the strategy worked.
"I was really hamstrung without the financing that I needed."
So Vaughan embarked on a scheme to raise money by issuing promissory notes with lucrative interest rates, secured by second mortgages on Vaughan's real estate investments and backed by his personal guarantee, according to the summary document obtained by the Journal.
When the investment properties sold, the profits and sales commissions that went to Vaughan were used to pay the investors.
"This worked like a charm," Vaughan said in the summary, referring to his first attempt at the scheme with 10 investors putting up $400,000.
The strategy expanded over the years, with Vaughan observing in the 2005 summary document: "What was a necessity in 1992 has become a very valuable tool for us."
The extent of the scheme today is still unclear.
There are about 400 investors with $20 million to $25 million invested, based on what Vaughan has said at private meetings, according to Albuquerque businessman Jules Appelman, an investor who was used as one of Vaughan's references.
Some families or entities such as trusts have $1 million invested, Appelman told the Journal.
Vaughan did not return calls seeking comment.
The annual interest rates on Vaughan's promissory notes to investors appear to range from 12 percent to 25 percent, which are rates of return normally associated with high-risk investments like junk bonds.
Promissory notes are securities regulated by the U.S. Securities and Exchange Commission and the Securities Division within the New Mexico Regulation and Licensing Department. The state Securities Division is investigating Vaughan's activities, although no charges have been filed.
'Not licensed to sell'
"The securities he was offering were not registered, and he was not licensed to sell securities," said department Superintendent Kelly O'Donnell. "The inquiry into Doug Vaughan extends beyond whether he was appropriately licensed and the securities were registered."
Promissory notes sold to the general public are often linked to fraud schemes, according to an SEC advisory to investors titled, "Broken Promises: Promissory Note Fraud." The SEC's main advice is to make sure the seller is licensed to sell securities and the security itself is registered.
Vaughan's financial problems exploded into public view earlier this month after both he and his residential real estate company, Vaughan Company Realtors, filed separate but related petitions for Chapter 11 bankruptcy protection. The filings give Vaughan, as an individual, and the company time to come up with plans to pay some or all of the debt owed to creditors.
Concerning the Chapter 11 petitions, O'Donnell said: "The bankruptcy is a separate but related issue to ours. The bankruptcy is providing information that may be valuable to us at some point."
In the late 1980s, Vaughan's businesses ran into financial problems when commercial real estate crashed, and many lenders, particularly savings and loan institutions, crashed with it. Banks tightened their loan requirements, much like what is happening today.
Needing cash in 1992, Vaughan consulted Albuquerque real estate attorney Sylvain Segal, according to the 2005 Executive Summary.
"He (Segal) said, 'Doug, you know many investors who know you quite well and have faith in you. You can borrow from them and give them what is in essence a second mortgage. They trust you,' " Vaughan said in the summary.
The promissory note scheme, secured by a second mortgage, was conceived. Segal was unavailable for comment due to illness, a spokeswoman said.
By definition, the word "scheme" is not necessarily negative.
The first definition listed in Webster's New World College Dictionary, Third Edition, is "a carefully arranged and systematic program of action for attaining some object or end."
The second definition is "a secret or underhanded plan or plot"; the third is "a visionary plan or project."
Investors have told the Journal that they were provided with references and the Executive Summary, which has no mention of any risk.
The Journal has learned that investigators are trying to determine whether the system functioned like a Ponzi scheme, in which money borrowed from new investors was being used to pay off earlier investors.
'Promises' to pay added
By the 2000s, the notes say Vaughan Company Realtors "promises" to pay the loan amount, plus the stipulated interest rate. In addition, Vaughan tacked on his own "Personal Guarantee" of payment.
Vaughan then tapped some of his more prominent investors to serve as investment references. They were:
• Appelman, owner of Academy Plumbing, Heating, Air Conditioning & Electrical Inc.
• Herb Beatty, a chiropractor.
• Tucker Haltom, an orthodontist.
• Ron Heggem, a CPA.
• Chet Stewart, owner of French Mortuary.
• Lee Straughan, president of Dale Carnegie Training for New Mexico and part of Texas.
Haltom and Heggem were identified as "not currently invested" in the 2005 list of references. Heggem told the Journal that he invested with Vaughan largely because he was a fraternity brother at the University of New Mexico. He said he cashed out to go "with a more secure type of investment."
Straughan, who said he thinks highly of Vaughan, also said he cashed out in favor of a more secure investment.
"If something sounds too good, it probably is," he said. "There were no hard feelings."
Appelman, an investor with Vaughan for 11 years, said he doesn't believe any wrongdoing led to the bankruptcy petitions or securities investigation. "The explanation is the real estate market has gone in the can," he said. "I have no reason to believe he pocketed the money."
In his personal bankruptcy filing, Vaughan indicated he had less than $50,000 in assets.
Other endorsers
Another three investors provided signed letters of recommendation, all dated in 2000, that Vaughan distributed to prospective investors. They were:
• Ronald Allred, president of Adherent Technologies Inc.
• Melvin Robins, a retired lawyer.
• Chon-Chiun Yeh, an acupuncturist.
Those listed as references said they would get occasional phone calls from prospective investors and would tell the callers that their experience with Vaughan had been good. None said he received any commissions or referral fees.
"I'm surprised at the turn of events," said Robins, who cashed out his investment roughly 10 years ago. "When I was dealing with him (Vaughan), everything was first rate."
When the news broke
Vaughan was arrested Feb. 25 after state securities agents went to his home to ask him questions. He left in a black Jaguar, and they followed him to a shopping center at Paseo del Norte and Barstow NE. They arrested Vaughan on charges of driving on a revoked license, which had been taken away after a DWI arrest.
The drunken driving charges were dismissed after an officer failed to appear and evidence was not available, but the revocation stood. After his Feb. 25 arrest, Vaughan was released on his own recognizance.
Vaughan has since resigned from the Vaughan Company Realtors he founded at the request of the management team.
In this five-year-old "Executive Summary" distributed to prospective investors, Vaughan describes his strategy to raise money from individual investors by issuing promissory notes with lucrative interest rates, secured by second mortgages on Vaughan's real estate investments and backed by his personal guarantee. When the investment properties sold, the profits and sales commissions that went to Vaughan were used to pay the investors.
You also can send comments via our comment form
|
|
